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FATF Mutual Evaluation Report on the UAE released

What’s new?

On 30 April 2020, the FATF published its mutual evaluation report on the UAE.

The report covers:

Summary of AML/CFT measures in place in the UAE as at the date of FATF’s on-site visit in 2019

Analysis of the UAE’s level of compliance with the FATF 40 recommendations and the level of effectiveness of the UAE’s AML/CFT system; and

Recommendations on strengthening the AML/CFT framework

Key take-aways

Sound regulatory framework – In the past few years, the UAE has made significant improvements to its AML/CFT system.

DIFC/ADGM lead the way – two of the leading Global Financial Centres worldwide, DIFC and ADGM were praised for having developed a detailed understanding of ML/TF risk in the areas they supervise and apply an effective risk based approach to supervision.

Work in progress – The UAE fragmented system of registries gives rise to a wide divergence across sub-jurisdictions in the levels of understanding, implementation and application of regulatory measures, the report says. Homogeneity in practices and increased supervision outside of financial free zones are expected going forward to cement the UAE’s position as a leading global financial centre.

The Financial Action Task Force (FATF) has made public the findings of its Mutual Evaluation Report on the UAE.

The report analyses the level of compliance with the FATF 40 Recommendations and the level of effectiveness of the UAE’s anti-money laundering and counter-terrorist financing (AML/CFT) system, and provides recommendations on how the system could be strengthened.

FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system against AML/CFT.

Key Findings

The Good

Sound regulatory framework

In the past few years, the UAE has made significant improvements to its AML/CFT system.

These related regulatory enhancements have had a positive impact on the UAE’s technical compliance ratings: the UAE is deemed ‘Compliant’ or ‘Largely Compliant’ in 34/40 of the ratings factors (and ‘Partially compliant’ in the six remaining ones).

Financial free zones lead the way

The report praises the Dubai Financial Services Authority (DFSA) and the Abu Dhabi Financial Services Regulatory Authority (FSRA) for having developed a detailed understanding of ML/TF risk in the areas they supervise and apply an effective risk based approach to supervision.

This comes as no surprise: the DIFC and ADGM rank as respectively 8th and 25th in the Global Financial Centres – a ranking of the competitiveness of financial centres worldwide – and a robust AML/CFT system is a key criteria in the assessment process.

Other key positive indicators

The UAE – the report notes – has a sound statutory ML offence, which a policy shift in 2018 is prioritizing.

One of the strong features of the jurisdiction’s framework is that authorities have access to a broad range of financial information sources to aid financial investigations. The UAE has a robust array of tools, data sets and capabilities it can employ to investigate and analyse TF-related activity, which the jurisdiction identifies and investigates to a large extent.

Work in progress

As is customary, the report points out material matters on which the jurisdiction has to improve going forward.

Implement now, assess tomorrow

While many of the enhancements to the UAE system have had a positive impact on the UAE’s technical compliance, a number of these measures – and the results of their implementation – are at early stage. Their impact on the effectiveness of the system will have to be reassessed going forward.

Substantial changes expected outside of ADGM/DIFC

The UAE has extremely large and diverse financial and non-financial support services sectors, and a vastly fragmented system of registries (39 different company registries) spread between highly regulated financial free zones, non-financial free zones and the UAE mainland.

This gives rise to a wide divergence across registries in the levels of understanding, implementation and application of regulatory measures.

Outside of the afore-mentioned financial free zones – the report notes – supervision will have to increase and the full range of sanctions be used to create a dissuasive environment.

Standards currently in place in DIFC and ADGM will rapidly and inevitably trickle down to other jurisdictions, leading to a homogeneity in practice across the financial and non-financial support services industries, irrespective of the jurisdiction.

Monitoring of operators in the UAE mainland and non-financial free zones is likely to dramatically increase too, driving bad operators out of business and forcing consolidation of smaller ones.

Real estate and precious metal operators: look out!

Drastic changes are on the horizon for the real estate market and dealers in gold and other precious metals as well, two sectors deemed “higher risk” which are key contributors to the UAE economy. Operators in these sectors – look out!

Conclusions

There is no doubt that the UAE is taking AML/CFT very seriously. Substantial resources have been put towards the topic which is at the top of the policy agenda.

In a short time, the country has taken significant steps in strengthening its framework. In many respects, the elements of a robust AML/CFT system are in place. The rapid rise of DIFC and ADGM as global financial centers are a clear evidence of this strategy.

But the required framework is relatively new and – like many other jurisdictions – its overall effectiveness will have to be tested going forward.

The UAE is a major international financial centre and trading hub. Continuous commitment to monitoring, coordination between the country’s vastly fragmented system of registries andhomogeneity of practices across the full range of financial and non-financial support services institutions are required to cement its position as one of the most competitive structuring centres worldwide, now and going forward.

About FATF

The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society.

The FATF has developed the FATF Recommendations, or FATF Standards, which ensure a coordinated global response to prevent organized crime, corruption and terrorism.

The FATF reviews money laundering and terrorist financing techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as cryptocurrencies gain popularity. The FATF monitors countries to ensure they implement the FATF Standards fully and effectively, and holds countries to account that do not comply.